Carbon-Wheat Market Dynamics
A decade into the new world of carbon offset trading, the environment is shifting from a ‘wild west’ to government-backed. Economic opportunities are crystallizing for grain farmers as a result.
There remain good reasons to criticize carbon markets, and to question their efficacy in valuing ecological outcomes, but they’re getting pretty hard to ignore. Stakeholders in agriculture must acknowledge that these markets exist to penalize greenhouse gas (GHG) emissions, and to incentivize the polluters to stop.
Economics use a combination of carrots and sticks to shift behavior. Carbon payments - via offsets, insets, CI scores, audits and other mechanisms - are a carrot; carbon taxes are a stick.
Wheat Market Outlook
The chart below shows the 5-year history of futures pricing for spring wheat. The Minneapolis contract usually reflects a premium over the soft and hard red wheats that trade against the Chicago and Kansas City contracts.
Source: Barchart.com
Kansas City and Chicago wheat futures tend to be more correlated with the corn market than Minneapolis, because lower-grade wheats are closer substitutes with other feedgrains. The delivery specifications against the Minneapolis contract most resemble bread wheat.
Physical grain is a substitute for futures because open positions automatically convert into cash in the delivery month. Herein lies the connection between the trade in commodities and the price of food.
Carbon and Commodity Crop Linkages
Backlash against new rules around environmental stewardship in agriculture is often misguided by a misunderstanding of the cause-and-effect of farm activities on society’s well-being. For example, the argument that carbon taxes increase the price of food falls apart upon examination of the facts:
Despite wheat futures prices trading at half where they were in 2022, cereal-based food prices aren’t falling. Crop production costs in export-oriented grain economies are not statistically correlated with domestic grocery retail prices.
The supply and demand balance for corn, canola and soybeans nowadays is most heavily impacted by growth in renewable fuel production. Unless a person eats exclusively fast-food, these crops aren’t staple foods.
The North American carbon economy is influencing commodity markets through fuels first. U.S. 45(Z) tax credits are shifting the markets for feedstocks of biofuel manufacturing quicker, and in a bigger way, than food company insets are going to impact the prices for food grain ingredients.
Certainly, there is the potential for the world’s major bread and flour companies to start paying farmers for low-emissions wheat and to alter the market structure, but they have been slow to move beyond mass-balance accounting shortcuts and pilot projects. For now, the market is driven solely by global forces, and remains vulnerable to further declines as a result of Russia’s aggressively cheap export program.
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